Krispy Kreme, Famously Touted by Nora Ephron, Seems Ever-Overvalued

Do you pity investors in Krispy Kreme Doughnuts (KKD)? I do. The stock has been an overpriced loser for more than a decade. I can’t prove it absolutely, but I think we can (lovingly) blame Nora Ephron, who passed away last week.

In early 1997 I was a spanking-new wire reporter for Dow Jones. I picked up my copy of the New Yorker and discovered therein a Talk of the Town. The brilliant writer, humorist and film director had been moved to write a paean to Krispy Kreme’s glazed confections.

“Most doughnuts,” she began, “cause doughnut stomach, the primary symptom of which is the recurring sense for hours afterward that you have eaten a doughnut earlier in the day.” Could she have been thinking of Dunkin' Donuts (DNKN)?
Krispy Kreme doughnuts were different, in the most marvelous possible way, she wrote. “The Krispy Kreme Original Glazed doughnut is yeast-raised and light as a frosted snowflake. It is possible to eat three of them in one sitting without suffering any ill effects.”

Ephron explained that new Manhattan Krispy Kreme franchise “on West Twenty-Third Street, with its retro green Formica tables and red-and-green neon ‘Hot Doughnuts Now’ sign, has become a shrine -- the sort of religious experience New Yorkers like me are far more receptive to than ones that actually involve God.” She noted that “The store on West Twenty-third Street has its problems—neighbors complain about the smell—but they are not financial.” The store’s owner, she said, expected to gross $1 million in his very first year of business.

Pure genius. I thrilled in Ephron’s delicious writing. There’s a fine old tradition of great writers obsessing over particular confections. (Think here of Marcel Proust’s meditations on the madeleine cookie.) Yet I also recoiled. Given what I was learning about the stock market’s lust for companies with lots of good buzz, I wondered if this might unintentionally overexcite investors about Krispy Kreme’s prospects.

Well, three years later, Krispy Kreme was one of the hottest IPOs of 2000. It went on a tear, topping out in 2003. Then it began its plunge.

Yet, remarkably, Krispy Kreme has never quite lost its status as a high-P/E stock. The company reported per-share losses from 2005 to 2010. It is now priced at 26 times the 24 cents a share the company is expected to earn in fiscal 2013. (Ignore the current PE ratio of less than 3, as it reflects a huge one-time gain in the 2011 fiscal year.)

Krispy Kreme’s investors seem totally blind to the company’s seeming inability to make good money. High on glazed doughnuts?

Again, I have no absolute proof, but I think that’s a tribute to Ephron. She was a smart, funny, classy writer who apparently endeared herself to a lot of people and who absolutely knew a good doughnut when she tasted one. I think I’ll go out and buy a Krispy Kreme now to honor her.

But Ephron was wrong about Krispy Kreme’s finances. Whatever the company’s assets are, they are certainly not financial.